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Improvement needed for reporting under new climate rules

Author: ICAEW Insights

Published: 05 Aug 2022

Separate reports from the FRC and FCA indicate that premium listed companies have made significant progress in the quality of climate-related reporting, but more needs to be done.

The Financial Reporting Council (FRC) reviewed 25 larger companies impacted by climate change and found that companies were able to provide many of the Task Force on Climate-related Financial Disclosures (TCFD) disclosures expected by the Financial Conduct Authority (FCA)’s Listing Rule, and climate-related reporting in the financial statements, marking a significant improvement in comparison with previous years.

However, there are several areas where companies will need to raise the quality of their disclosures in future years.

The FRC report found that companies needed to provide more granular information about the effect of climate change on different business sectors and geographies. The discussion between climate-related risks and opportunities needs to be more balanced. 

Climate-related disclosures are not fully linked to other risk management and governance processes. More explanation was also needed around how companies decide what climate-related information should be disclosed, and how the valuation of their assets and liabilities are affected by various global warming scenarios and their own net zero commitments. The report also outlines a disconnect when it comes to discussing the impact of climate change on the financial statements. Much of this discussion was described as “generic in nature and hence not very helpful in understanding the relationship between climate related risks and amounts in the financial statements.” 

We may challenge companies who disclose significant climate risks or net zero transition plans in narrative reporting, but who do not appear to adequately explain how this has been taken into account when preparing their financial statements.

“It is encouraging that many companies have stepped up their efforts in providing comprehensive and consistent disclosures on climate-related risks and opportunities, as well as the impact of climate on their financial statements,” Sarah Rapson, Executive Director of Supervision at the Financial Reporting Council, said. “But there is still a lot of room for improvement. Together with the FCA, we will continue monitoring and supporting companies to make those improvements going forward.”

The FCA reviewed 170 companies at a high level and 30 companies in detail. It also found a significant increase in the quantity and quality of climate-related disclosures. 

However, it also found that some companies had said they had made disclosures consistent with TCFD recommendations, but apparently had not in reality. The FCA is considering these cases in more detail and may take action as appropriate.

While over 90% of companies self-reported that their disclosures in the Governance and Risk Management pillars were consistent with TCFD requirements, that fell to 81% when it came to meeting all seven recommended disclosures.

The quantitative elements of TCFD requirements were particularly lacking, for example, scenario analysis, and metrics and targets.

“We are pleased to see improvements in the completeness and consistency of disclosures with the TCFD framework, but there is clearly more to do,” said Sacha Sadan, Director of ESG at the Financial Conduct Authority. “We will continue to work with companies, their advisors and the FRC as they further develop their disclosures. We are committed to driving higher standards in the financial industry and we also encourage companies to look ahead to the future implementation of reporting standards in development by the International Sustainability Standards Board.”

Companies should take account of the TCFD’s Guidance for All Sectors when determining the consistency of their disclosures with the TCFD framework. The FCA also reminds companies of other guidance provisions included in its Listing Rules.

“The FRC and FCA reports are an essential read and provide a useful insight into the current quality of TCFD disclosures”, says Kate Beeston, Technical Manager in ICAEW’s Financial Reporting Faculty. “The reports also give clear, practical guidance to help preparers improve their reporting and achieve high-quality climate disclosures that meets investors’ needs.”

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